Railway  F^jSSIRation. 


THE 


PROPOSED  RAILWAY  TRUSTS. 


BY 


vr- 


Charles  Fy  Beach,  Jr. 


OP  THE  NEW  YORK  BAR. 


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^  Reprinted  from  the 

"^Railway  a^d  Corporation 
H  Law  Journal  of 

p  July  27,  1889. 

o 


ii  THE  PROPOSED  RAILWAY  TRUSTS. 


The  revival  of  discussion  concerning  a  railroad 
L  trust,  or  an  inter-associatifou  yof  ^such  trusts  in  the 
various  sections  of  the  country  where  it  ibi  sfup^t-  , 
posed  they  might  be  useful,  is,  perhaps,  (a  natural 
result  of  the  conceded  failure  of  State  and  federal 
legislation,  on  the  one  hand,  and  of  the  several 
voluntary  associations  among  rail’ways  or  railway 
officials,  on  the  other,  to  solve  satisfactorily  all  the 
problems  that  are  involved  in  railway  operation 
and  management  in  this  country.  We  have  tried 
State  statutes  and  Federal  statutes.  State  boards  of 
railroad  commissioners.  Interstate  Commerce  Com¬ 
missions,  Interstate  Commerce  Railwav  Associa- 
tions,  CrangeiTegislation,  Trunk-line  Pools,  Traffic 
»  Associations,  Judge  Cooley  and  Mr.  Fink,  all  with¬ 
out  avail,  and  we  begin  to  perceive  either  that  the 
railways  must  contrive  some  new,  effective,  stable 
1^1  and  equitable  control  of  themselves,  having  due 
regard  to  the  interests  of  the  public  and  of  the 
owners  of  the  property  involved,  or  that  we  shall 
presently  end  in  absolute  governmental  ownership 
and  operation. 

We  have  learned  that  railways  without  reguU-^ 
tion  will  not  be  tolerated  in  this  country*)  that 


2 


I  \ 


legislation  of  the  sort  hitherto  attempted  docs 
only  a  little  good  and  a  great  deal  of  harm ;  that 
associations  between  rail  vTays  themselves,  or  among 
railway  officials,  being  only  palliatives  and  make¬ 
shifts,  are  inherently  too  weak  to  serve  either  the 
railways  or  the  public  efficiently  ;  that  the  pro¬ 
gress  of  consolidation  of  lines  can  neither  be  swift 
nor  sW'Oeping  enough  to  answer  the  purpose,  and 
we  now  discover  that^ic  midsummer,  1889,  having 
,  wasted  our  substance  on  many  physicians,  w’e  are 
kittle  better  off  than  we  w^eie  twenty-five  years  ago. 
We  have,  indeed,  made  some  progress  since  the 
early  days  when  the  public  had  no  rights  that  a 
railroad  w-as  bound  to  respect,  and  since  that  later 
time  when  railroads  were  pillaged  and  plundered 
by  the  public  as  though  they  w^ere  a  common  ene¬ 
my  ;  but  we  are  still  in  a  wretched  predicament, 
and  very  far  from  a  condition  of  railroad  operation 
which  secures  to  the  public  all  it  ought  to  have  and 
preserves  to  the  railways  all  the\'  are  entitled  to. 
The  railw^ays  must,  therefore,  set  about  in  good 
earnest  to  devise  a  remedy  or  we  shall  presently  be 
face  to  face  with  governmental  operation.  It  is 
idle  to  ciy  peace,  peace,  wdien  there  is  no  peace. 
This  is  precisel}^  the  turn  that  railway  affairs  in 
the  United  States  are  now  taking. 

The  proposition  to  operate  railways  by  means 
of  an  association  between  the  shareowmers  of  con¬ 
necting,  parallel  or  competing  lines — associations 
between  the  railways  themselves,  or  their  officials, 
having  proved  ineffectual — is,  in  this  view  of  the 


1? 

7 


o 

o 


( 

situation,  entitled  to  the  mast  intelligent  consider¬ 
ation.  It  is  the  purpose  of  this  essay  to  suggest 
some  things  to  be  avoided  in  the  creation  of  such 
an  association,  and  to  propose  some  objects  desir¬ 
able  to  be  attained  thereby. 

If  on  consideration  it  be  determined  that  volun¬ 
tary,  unincorporated  associations  between  the  share- 
owners  of  certain  railways  are  desirable — that  is, 
that  railway  trusts  are  desirable — let  us  begin  by 
not  calling  them  “trusts.”  The  public  are  pos¬ 
sessed  of  an  unreasoning  dread  of  what  they  call 
“  trusts,”  and  the  public  temper  is  in  a  feverish 
state  regarding  them.  Not  one  man,  indeed,  in  a 
thousand,  who  is  in  a  state  of  consternation  over 
“  trusts,”  knows  what  a  trust  really  is,  or  how  it 
is  constituted,  or  what  it  is  designed  to  effect,  or 
what  it  actually  accomplishes.  He  has  been 
taught  his  terror  by  the  newspapers  and  the  poli¬ 
ticians.  Seven  hundred  and  fifty  out  of  the  thou- 
^nd  will,  when  trusts  are  explained  to  them,  cease 
to  regard  them  with  alarm.  The  remaining  two 
hundred  and  fifty  are  possibly  incorrigible.  They 
are  not,  however,  this  time  Matthew  Arnold’s  “re¬ 
deeming  minority,” — on  the  contrary,  quite  the 
reverse.  In  christening  the  railway  trust  it  will 
then  be  wise  to  take  due  account  of  this  condition 
of  the  public  mind,  and  it  will  be  a  step  in  the 
right  direction  to  quit  calling  it  a  “  trust.”  It 
may  be  called  anything  but  that.  If  it  be  called 
an  association,  or  a  voluntary  association,  or  a  vol¬ 
untary  unincorporated  association  the  public  will 


4 


not  be  scared.  When  an  organization,  not  indeed 
created  on  the  trust  theory,  but  designed,  as 
towards  the  public  at  least,  to  accomplish  in  some 
respects  very  much  the  same  ends  contemplated  in 
the  creation  of  trusts,  was  lately  called  the  ‘‘Inter¬ 
state  Commerce  Railway  Association,”  no  one  was  ^ 
seriously  disturbed,  and  nobody  shouted  “  conspir¬ 
acy  ”  or  “stop  thief.’’  The  partisan  newspapers 
also  who,  in  one  column  were  bawling  out  vituper-  J 
ation  of  “  trusts,”  on  another  page  gleefully  make  ' 
small  jokes  over  what  they  called  an  “  agreement 
among  gentlemen.”  They  were  so  taken  with 
their  wit  that  they  entirely  overlooked  what  they 
might  have  called  the  “  trust  ”  iniquity  that  lurked 
in  it.  Witness  also  the  persistence  with  which 
they  miscall  the  North  American  Salt  Co.  a 
“  trust.”  It  will,  in  this  state  of  the  public  intelli¬ 
gence  and  temper,  be  wise  to  throw  it  a  sop  in  the 
matter  of  the  name  for  the  railway  trust. 

It  may  also  be  well  to  avoid  any  attempt  at 
secrecy  in  the  formation  of  such  a  trust.  It  is 
neither  foolish,  nor  wicked,  nor  in  any  degree  un-  ♦ 
lawful  for  stockholders  to  organize  themselves  in 
the  way  here  proposed,  and  there  is,  therefore,  no 
motive  for  any  elaborate  effort  to  conceal  what  is  ^ 
proposed.  The  commercial  trusts,  some  of  them, 
made  a  mistake  in  trying  to  cover  up  their  organ¬ 
ization.  While,  perhaps,  it  is,  strictly  speaking, 
no  outsider’s  business  how  or  why  a  trust  of  this 
sort  is  entered  into,  nevertheless,  if  any  outsider 
thinks  it  is,  and  wants  to  see  the  wheels  go  around, 


0 


it  will  rob  the  “  trust  ”  of  one  of  its  terrors  to  be 
entirely  open  about  it.  It  will  be  remembered  that 
last  winter  it  was  strenuously  urged  that  trusts 
are  “secret,”  as  if  upon  the  theory  that  all  other 
business  undertakings  among  men  are  as  open  as 
the  day;  and  there  is,  it  will  be  conceded,  some 
color  of  excuse,  as  people  and  politicians  go,  for 
popular  outcry  against  any  such  enterprise  which 
is  at  once  novel  and  ostentatiously  secret.  Let  the 
railroad  trust,  therefore,  be  formed  just  as  other 
organizations  are  formed,  without,  on  the  one 
hand,  any  parade  of  details,  and  equally  without 
any  pass-words,  grips,  or  countersigns. 

Another  matter  to  be  especially  insisted  upon  is 
that  the  trust  certificates  be  not  listed  or  dealt  in 
on  the  floor  of  any  Exchange  here  or  abroad.  If 
railway  managers  propose  in  good  faith  to  organ¬ 
ize  a  trust  to  promote  legitimate  railway  operation, 
and  are  willing  to  conduct  their  business  in  the 
public  interest  and  for  the  profit  of  the  owners  of 
the  property  entrusted  to  them,  they  will  incorpo¬ 
rate  this  provision  as  a  cardinal  principle  in  their 
deed  of  trust.  The  functions  of  a  rail  wav  mana- 

V 

ger  and  of  a  gambler  in  railway  securities  are  not 
compatible,  and  there  should  be  no  possibility  and 
no  temptation  to  unite  them  in  respect  of  these 
trust  certificates.  Legitimate  railway  management 
imperatively  requires  that  the  manager  of  a  rail¬ 
way  keep  out  of  Wall  Street,  at  least  so  far  as  the 
securities  of  the  road  he  manages  are  concerned. 
It  is  his  sole  function  to  operate  his  road  and  to 


6 


discharge  the  trust  commicted  to  him  as  a  business 
man,  and  not  as  a  bull  or  a  bear  on  the  Stock  Ex¬ 
change.  The  declaration  of  trust,  then,  should 
arbitrarily  prohibit  the  listing  of  these  certificates 
on  any  stock  exchange.  xVny  railway  official  w’ho 
opposes  this  feature  of  a  railway  trust  is  primarily  ^ 
a  stock  speculator,  and  only  incidentally  a  railway 
manager;  and  such  a  man  is  not  a  safe  adviser  in 
regard  to  railway  policy.  ^ 

Approaching  the  matter  of  the  formal  organiza¬ 
tion  of  such  a  trust,  account  must  be  taken,  first, 
of  the  public  or  semi-public  functions  imposed  by 
rules  of  law"  and  public  policy  upon  common  car¬ 
riers;  and,  second,  of  certain  particular  disabling 
requirements  of  law  affecting  railway  corporations, 
a  violation  of  which  must  be  scrupulously  avoided. 
The  association  contemiDlated  must  be  entirely  be¬ 
tween  the  individual  stockholders  or  stock  and 
bondholders,  and  not  at  all  between  the  railway 
corporations  themselves.  The  corporation  must  be 
absolutety  independent  of  the  trust,  and  wffiolly 
separate  and  apart  from  it.  ^ 

In  formulating  the  scheme  regard  must  be  had 
to  the  rule  of  law  that  one  railwav  companv  can- 
not  vote  on  the  stock  of  another  railway  company.  » 
It  may  sometimes  lawfully  acquire  the  stock  of  an¬ 
other  road,  and  it  may  then  lawfully  hold  it  and 
receive  dividends  on  it;  but  it  is  becoming  a  well 
settled  rule  that  it  cannot  vote  on  it  at  corporate 
meetings,  either  directly  or  through  the  medium 
of  trustees.  There  is  already  ample  authority  for 


7 


this  position,  and  there  will  be  more  before  there  is 
less.  The  courts  of  chancery  are  setting  their  face 
against  this  form,  of  control  of  one  railway  by  an¬ 
other,  and  it  cannot  enter  directly  or  indirectly 
into  any  feasible  scheme  of  railway  association. 

Again,  the  courts  have  decided  that  the  right 
to  vote  on  railway  shares  cannot  by  proxy  be  irre¬ 
vocably  separated  from  the  ownership.  There  can 
be  no  such  thing  as  an  irrevocable  proxy  to  vote 
railway  stock.  This  form  of  control  of  railway 
property  has  been  tried  over  and  over  again,  v/iih 
all  the  possible  variations,  and  has  uniformly  failed. 
The  Cincinnati,  Hamilton  and  Dayton,  the  Yander- 
bilt-Hostetter,  and  the  Philadelphia  and  Reading 
voting  trusts  are  recent  instances  of  the  inutility  of 
such  a  device.  Any  scheme,  therefore,  to  succeed, 
must  wholly  eliminate  any  contrivance  of  this  na¬ 
ture.  We  must  conceive  something  more  enduring 
than  an  attempted-irrevocable  proxy. 

It  is  as  of  course  that  any  sort  of  a  rope  of  sand 
will  hold  as  long  as  there  is  no  contest.  What  is 
now  required  is  some  form  of  association  that  will 
cohere  in  the  face  of  a  tempest,  that  can  survive  a 
lawsuit,  and  withstand  the  assaults  and  outlive  the 
dissatisfaction  of  a  minority,  in  interest.  We  can¬ 
not,  therefore,  look  to  any  scheme  of  railway  con¬ 
solidation,  however  plausible  it  may  appear  and 
however  gigantic  its  proportions,  as  the  solution  o  f 
our  present  difficulties.  .  The  country  is  too  large, 
the  railways  too  numerous,  and  the  legal  and  tech¬ 
nical  embarrassments  too  serious  for  such  an  under 


I 


8 

taking  to  float  Consolidation  creates  great  systems, 
and  is  good  as  far  as  it  goes;  but  it  can  never  go 
in  this  country  as  far  as  it  is  necessary  for  some¬ 
thing  to  go  in  order  to  relieve  our  railways  from 
their  present  straits.  The  promoters  of  the  mon¬ 
strous  scheme  to  consolidate  the  trans-continental 
lines  by  charter  from  the  federal  government  which 
has  lately  been  made  the  subject  of  some  newspaper 
comment — if  it  have  any  substantial  existence — 
will  find  out,  even  if  they  succeed,  that  their  suc¬ 
cess  is  only  another  form  of  failure.  If  our  ter¬ 
ritory  were  no  larger  than  England  and  Scot¬ 
land  the  scheme  that  furnished  relief  there  might 
avail  here;  but  railways  in  the  British  Islands  arc, 
as  compared  to  our  overgrown  proportions,  scarcely 
more  than  a  laboratory  experiment.  We  must  also 
avoid  any  plan  of  association  which,  in  the  dispo¬ 
sition  of  earnings,  is  obnoxious  to  the  objection 
that  it  violates  the  provision  of  the  Interstate  Com¬ 
merce  law  against  pooling.  This  will  possibly  be 
the  most  difficult  point  to  compass  in  drafting  or 
devising  a  trust  deed. 

To  specialists  in  railroad  law  and  to  laymen 
trained  in  this  sort  of  speculation,  these  sugges¬ 
tions,  many  or  all  of  them,  will  seem  threadbare 
and  commonplace,  but  there  is  a  much  more  gen¬ 
eral  lack  of  precise  knowledge  upon  the  matters 
here  considered,  even  among  railway  men,  than  is 
perhaps  generally  believed.  It  is,  therefore,  safe 
sometimes  to  talk  elementary  principles.  The 
following  Associated  Press  dispatch,  which  re- 


9 


cently  appeared  in  the  morning  papers,  suggests 
the  crudeness  of  many  men’s  ideas  on  this  sub-' 
ject:— 


‘‘Chicago,  July  14. —  The  attorney  for  one  of 
the  largest  railway  companies  having  offices  in  this 
city,  said  to-day  in  regard  to  the  proposed  Railroad 
Trust: — ‘  The  injunction  obtained  against  the  Ore¬ 
gon  Transcontinental  Company,  preventing  it  from 
voting  its  controlling  stock  at  the  Oregon  Naviga¬ 
tion  election  a  month  ago,  following  the  decision 
refusing  to  allow  the  East  Tennessee  to  vote  its 
Memphis  and  Charleston  stock,  killed  all  hopes 
of  a  railroad  trust  ever  being  formed.’  ” 

i  (  “ 

Of  course  “  the  attorney  for  one  of  the  largest 
railways  ”  never  delivered  himself  of  any  such  non¬ 
sense  as  that,  and  of  course  if  he  did  he  was  the 
cow-case  member  of  the  firm,  and  might  with  equal 
wisdom  have  included  in  his  citation  of  authorities 
the  leading  case  of  Bardell  v.  Pickwick^  which  is 
an  excellent — and  to  the  present  writing  unover¬ 
ruled — authority  against  a  certain  sort  of  “  trust.” 

The  intent  or  objects  to  be  attained  by  the  cre¬ 
ation  of  a  railway  trust  will  amply  justify  it,  and 
ought  to  be  plainly  and  specifically  declared  in  the 
trust  deed.  Among  the  substantial  inducements 
to  such  an  organization  are  economy  in  the  opera¬ 
tion  of  the  associated  lines ;  the  suppression  of  the 
competition  of  reckless  and  insolvent  rivals,  in¬ 
cluding  the  prevention  of  rate  wars  and  rate  cut¬ 
ting;  the  prevention  of  over-building,  involving 
wholesome  restraint  upon  speculative  construction, 


10 


and  recognizing  the  fact  that  there  is  a  possible 
over-production  of  railways,  as  well  as  of  sugar  or 
salt;  the  protection  of  each  road  from  the  encroach¬ 
ments  of  its  rivals ;  the  protection  of  all  the  lines  in 
the  construction  of  necessary  branches  and  feeders, 
and  the  protection  of  the  public  in  the  construc¬ 
tion  of  new  lines;  the  maintenance  of  steady  rates, 
leaving  the  railways  to  compete  in  facilities  only 
and  not  in  rates,  which  is  the  only  healthy  compe¬ 
tition  among  common  carriers  when  rates  are  nor¬ 
mal;  the  protection  of  the  weaker  lines,  and  an 
arrest  of  the  present  tendency  toward  their  absorp¬ 
tion  by  the  stronger  systems,  and  finally  a  stay  in 
the  progess  now  certainly  making  toward  govern¬ 
mental  interference  and  operation.  All  this  and 
more  may  be  secured  by  a  railway  trust  honestly 
and  intelligently  organized. 

If  the  railways  do  not  control  themselves,  the 
federal  government  will,  somehow  or  other  be  in 
control  within  a  dozen  years.  Our  railway  man¬ 
agers  have  conducted  themselves  frequently,  in  the 
matter  of  competition,  in  the  most  puerile  and 
irresponsible  fashion,  carrying  on,  at  the  expense 
of  the  stock  and  bondholders,  railway  slugging 
matches,  for  stock  jobbing  purposes  or  for  the 
mere  gratification  that  comes  from  a  fracas.  A 
railway  tmst  of  the  sort  here  considered  will  rele* 
gate  such  antics  to  the  back-yard,  because  it  will 
put  railway  operation  on  the  same  plane  as  other 
sound  business  enterprises,  and  make  it  possible  to 
operate  a  railway  line  with  a  decent  regard  both 


11 


to  the  interests  of  the  property  to  be  riianaged  and 
the  public  to  be-  served. 

To  come  more  directly  to  the  details  of  the  ar¬ 
rangement,  I  suggest  that  it  will  not  be  necessary, 
or  even  expedient,  to  bring  into  the  trust  arrange¬ 
ment  at  first  more  than  a  majority  of  the  stock  of 
any  road  embraced  in  the  scheme.  An  outstand¬ 
ing  minority  of  the  stock,  a  part  of  which  is  in 
friendly  hands,  will  not,  even  under  a  system  of 
cumulative  voting,  interfere  with  the  control 'of  the 
property  by  the  trust,  and  it  will  serve  to  secure  to 
the  minority  such  a  voice  in  the  management  of 
the  road  as  a  minority  of  right  ought  to  have.  The 
advantages  of  the  trust  will  probably  put  a  pre¬ 
mium  upon  coming  in,  and  th3  outstanding  shares 
will  continually  tend  to  conversion  into  certificates. - 
If  this  be  so,  the  trust  will  justify  itself,  if  it  be 
otherwise,  no  harm  can  come  of  it,  and  the  minority 
can,  as  now,  exercise  all  their  rights,  without 
blocking  the  game. 

'  It  will  be  necessary  to  divide  up  the  territory 
to  be  covered  on  some  natural  lines  of  division, 
and  to  create  a  trust  for  the  railways  of  each  sec¬ 
tion.  Thus,  suppose  a  trust  for  the  trunk  lines, 
another  for  the  territorv  west  and  south  of  St. 

%j 

Louis,  another  north  and  west  of  Chicago,  another 
for  the  Atlantic  seaboard,  another  for  New  England 
and  certain  of  the  Canadian  lines,  another  for  the 
south  Mississippi  valley,  another  for  the  territory 
having  its  centre  at  Denver,  and  finally  one  for  the 
Pacific  coast.  These  several  trusts  could  all  be  in- 


12 


ter- associated  and  work  together  to  a  common  end. 
In  each  case  there  might  be  created  a  trust  board 
of  tw'enty-one  members  including  representatives 
of  the  stock  and  bonded  interests  of  the  lines  in¬ 
cluded  in  the  scheme,  w’hfch  should  act  as  a  com¬ 
mittee  of  the  whole  in  determining  the  policy  of 
the  trust,  but  to  be  subdivided  into  as  many  com¬ 
mittees,  of  three  members  each,  as  there  are  roads 
to  be  operated,  no  two  members  to  constitute  a 
majority  of  any  two  of  these  subcommittees. 

A  majority  at  least  of  the  stock  of  each  of  the 
roads  should  then  be  conveyed  absolutely  to  the 
trust,  and  the  title  taken  in  the  names  of  these  sub¬ 
committees,  the  stock  of  each  road  to  be  in  the 
name  of  a  different  committee,  to  be  registered  on 
the  books  of  the  corporation  in  their  individual 
names,  and  to  be  held  by  the  trust  endorsed  in 
blank,  for  the  purposes  declared  in  the  deed  of 
trust.  For  this  stock  so  conveyed  to  the  trust 
there  should  be  issued,  as  usual,  trust  certificates  to 
the  several  surrendering  shareowners.  In  other 
words,  the  usual  provisions  of  a  trust  arrangement 
should  be  entered  into  between  the  stockholders 
constituting  the  association.  This  majority  would 
elect  the  boards  of  directors  and  operate  the  prop¬ 
erties  pursuant  to  the  provisions  of  the  trust  deed 
and  as  the  interests  of  the  business  might  dictate. 
Each  road  would  thus  maintain  its  corporate  organ¬ 
ization,  and  carry  on  its  business  independently, 
conforming  to  all  the  rules  of  law  affecting  its  ex¬ 
istence  and  operation,  and  performing  as  a  com- 


13 


moD  carrier  all  its  duties  to  the  public,  precisely, 
as  to  the 'public^  as  though  there  were  no  trust.  The 
public  would,  therefore,  not  be  heard  to  chal¬ 
lenge  the  trust. 

Dividends  should,  in  every  instance, be  declared 
directly  on  the  stock  of  each  road  as  earned,  and 
paid  over,  as  usual,  directly  to  each  stockholder 
as  the  stock  books  declare.  Thus  the  outstanding 
stock  would  receive  its  dividend  directly,  and  the 
dividends  on  the  stock  included  in  the  trust 

t 

would  be  paid  into  the  trust  and  be  re-distributed 
on  the  certificates.  This  contrivance  would  entire¬ 
ly  avoid  the  inhibition  of  the  Interstate  Commerce 
law  against  pooling,  and  shut  off  any  possible  ob¬ 
jection  to  the  trust  scheme  at  this  point  predicated 
upon  the  pooling  of  earnings  or  the  public  func¬ 
tion  of  the  railway  as  a  common  carrier. 

The  corporation,  qua  corporation,  thus  touches 
the  trust  at  no  point.  There  is  created  merely  a 
voluntary,  unincorporated  association  between  the 
owners  of  a  majority  of  the  stock  of  the  allied 
lines.  Such  an  association,  it  is  hardly  necessary 
to  say,  is  absolutely  lawful,  both  in  itself  and  in  its 
purposes.  No  legislation,  either  State  or  federal, 
can  ever  be  successfully  aimed  against  it,  and  no 
hostile  court  can  ever  dissolve  it  as  long  as  the  Con¬ 
stitution  of  the  United  States  and  of  the  several 
States  of  the  Union  are  the  supreme  law.  The 
right  to  do  business  in  partnership  with  one's 
neighbors  is  guaranteed  to  the  people  of  these 
United  States  not  only  by  our  written  constitutions. 


14 


but  by  the  rules  of  the  common  law,  and  it  will  not 
become  unlawful  in  any  civilized  community  in  the 
near  future.  Upon  the  invitation  of  the  editor  of 
The  Forum  I  have  emphasized  this  view  of  the  le¬ 
gality  of  trusts  in  an  article  entitled  Facts  about 
Trusts,” — published  in  the  September  number  of 
that  periodical — to  which  reference  is  here  made 
for  a  fuller  statement  of  the  points  involved.  ' 

Two  classes  only,  speaking  broadly,  will,  it  is  ^ 
believed,  oppose  such  an  association  among  rail¬ 
way  shareowners;  namely,  (a)  such  railway  mana¬ 
gers  as  combine  the  character  of  a  railway  official 
and  stock  speculator,  and  (&)  the  politicians  and 
their  victims.  But  the  opposition  of  neither  of 
these  classes  will  be  formidable  if  the  owners  of 
railway  property  can  be  united  in  support  of  the 
scheme.  It  should  be  carefully  canvassed  and 
seriously  considered  before  it  is  abondoned  as  im¬ 
practicable.  It  is,  verily,  a  feasible  proposal,  and 
one  which,  if  carried  out  intelligently  and  in  good 
faith,  under  a  declaration  of  trust  skillfully  devised, 
promises  more  for  legitimate  railroading  in  the  ^ 
United  States  than  any  other  form  of  railway  asso¬ 
ciation  and  control  yet  suggested. 


Reprinted  from  the 
Railway  and  Corporation 
Law  Journal  of 
Jan.  II,  1890, 


II. 

THE  ATCHISON  VOTING  TRUST. 


The  Atchison  re-organization  now,  happily,  cer¬ 
tain  of  success  beyond  a  peradventure,  includes, 
by  the  recent  action  of  the  committee  in  charge, 
()ne  feature  of  uttermost  importance  if  the  re-or¬ 
ganization  is  really  to  re-organize  and  reconstitute 
that  great  property,  and  if  the  management  of  the 
road  by  its  owners  is  to  be  perpetuated.  Messrs. 
Kidder,  Peabody  &  Co.,  through  whom  the  fi¬ 
nancial  operations  looking  to  the  re-organization 
have  been  conducted,  in  an  advertisement  in  the 
commercial  newspapers,  are  calling  upon  the 
holders  of  the  new  stock  to  enter  into  a  voting  trust 
for  the  permanent  control  of  the  corporation  by 
the  present  owners  of  the  securities.  The  bonded 
indebtedness  of  the  new  organization  will  be  about 
$230,000,000,  and  the  par  value  of  the  stock 
$75,000,000.  At  the  present  prices  the  bonds  are 
worth  $150,000,000,  while  the  stock  is  worth  not 
more  than  $25,000,000.  If  the  new  enterprise 
prosper  the  value  of  the  bonds  is  likely  to  increase 
more  rapidly  than  that  of  the  stock,  so  that  the 
ratio  of  1-7  of  stock  interest  in  the  property  to  6-7 
of  bonded  interest  is  reasonably  certain  not  to  grow 
more  favorable  to  the  smaller  investment. 

The  stock  represents  now  about  one-seventh  of 


IG 


the  value  of  the  corporate  property,  and  is  not  likely 
to  represent  more.  Under  the  ordinary  conditions 
this  one-seventh  of  stock-holding  interest,  or  even 
a  scant  majority  of  it,  representing  not  more  than 
one  fourteenth  of  the  value  of  the  property,  may 
elect  a  board  of  directors,  take  absolute  and  undis¬ 
turbed  possession  of  the  property  and  manage  it 
for  at  least  a  year,  without  any  other  than  an  inci¬ 
dental  regard  for  the  interests  represented  by  the 
other  half  of  the  stock  and  by  all  the  bonds.  This 
is  indeed  the  ordinary  course  of  business  in  lailway 
management  in  these  latter  days.  In  the  case  of 
the  Atchison  security  holders  it  is  not,  therefore, 
strange  that  an  effort  should  be  made  to  place  the 
management  and  control  of  the  property — of  their 
property — in  responsible  and  friendly  hands,  and 
to  build  some  wall  of  defense  for  themselves  against 
the  danger  of  having  the  board  fall  into  the  hands 
of  any  speculator  or  syndicate  that,  two  months 
before  election,  might  put  a  million  or  two  into 
margins  on  the  stock,  or  eight  or  ten  millions  into 
the  stock  itself.  As  the  matter  would  stand  with¬ 
out  the  voting  trust,  it  would  be  possible  to  buy 
or  borrow  a  control  of  the  election  in  any  year,  for 
no  greater  a  price  than  that,  and  thus  to  oust  the 
owners  absolutely  from  the  operation  of  their  prop¬ 
erty.  Such  financial  performances  are  the  amuse¬ 
ment  of  every  business  day  in  Wall  street.  The 
Atchison  management  have,  therefore,  wisely  de¬ 
termined  to  create  a  voting  trust. 

About  these  “trusts”  as  we  know,  there  are 


17 


many  pitfalls.  There  is  the  C.  H.  &  D.  pitfall,  and 
the  Reading  pitfall,  and  the  Hostetter-Yanderbilt 
pitfall,  and  possibly  some  other  not  yet  catalogued 
specimens,  into  one  or  other  of  which  the  unwary 
voting-trust  maker  is  in  danger  of  stumbling.  The 
Atchison  bondholders  under  the  re-organization 
plan  are  also  stockholders,  and  if,  instead  of  selling 
their  stock,  they  place  it  in  the  proposed  trust, 
they  may  perpetuate  a  lawful  control  for  themselves 
of  the  properiy  without  sacrificing  any  advantage 
incident  to  the  ownership  of  the  shares,  except  the 
mere  right  to  vote,  which  as  corporate  elections 
and  railway  management  go  is  more  often  a  bur¬ 
den  than  a  benefit. 

The  only  practicable  voting  trust — that  is  to  say 
the  only  one  yet  devised  that  the  courts  and  the 
politicians  will  not  undo — is  one  created  by  the 
absolute  transfer  of  the  stock  to  the  trustees  in 
exchange  for  a  trustee’s  certificate  in  the  nature  of 
a  declaration  of  trust.  This  may  be  perpetual  or 
for  a  term.  This  trust  as  between  each  stockholder 
and  the  trustees  may  be  personal,  and  there  need 
be  no  other  contract  between  trustee  and  cestui  que 
trust  than  that  set  forth  in  the  trust  certificate. 
Each  stockholder  enters  into  the  contract  for  him¬ 
self  alone,  without  reference  to  any  other  stock¬ 
holder  and  withot  any  possible  privity  with  any 
one  else.  If  one  such  trust  agreement  is  valid, 
twenty  thousand  are  equally  so,  each  standing  by 
itself  and  being  the  voluntary  deed  of  each  stock¬ 
holder  for  himself.  The  legal  ownership  of  the 


stock  bv  the  trustees  would,  after  the  issue  of  the 
trust  certificates,  consist  solely  in  the  right  to  vote, 
the  trust  certificate  re-conveving  to  the  shareowner 
all  the  beneficial  interest  in  the  stock.  The  trans¬ 
action  is,  in  this  view  of  it,  a  sort  of  defloration  or 
emasculation  of  the  stock. 

The  trustees  are  then  subject  only  to  the  general 
rules  of  equity  which  govern  trusts.  They  should 
be  chosen  because  of  their  fitness  for  such  a 
stewardship,  and  should  be  absolutely  beyond  the 
infiuence  of  the  certificate  holders.  They  could 
not  elect  themselves  to  office,  nor  vote  themselves 
remuneration.  They  ought  to  have  the  power  to 
appoint  their  successors,  possibly  with  the  assent 
of  the  certificate  owners.  They  would  elect  the 
board  of  directors,  which  is  all  that  the  stock¬ 
holders  acting  for  themselves  ever  can  do,  and 
their  visitorial  power  would  amount  to  something 
while  that  of  stockholders  amounts  to  nothing. 
The  ultimate  power  to  control  the  corporation 
must  be  vested  in  some  bodv  of  men.  This 
scheme  v^csts  it  in  a  responsible  board  of  trustees, 
instead  of  in  an  iiresponsible',  ignorant  and  utterly 
careless  body  of  stockholders.  The  trustees  would 
be  responsible  for  good  management  and  would  be 
under  every  motive  which  actuates  men  of  honor 
to  secure  it.  No  corrupt  ‘‘  ring  ”  of  officials  could 
be  formed  to  “  run”  the  property  for  their  personal 
emolument,  and  no  tried  and  competent  official 
would  be  likely  to  be  removed.  The  trustees 
should  be  men  of  experience  in  railroad  manage¬ 
ment,  and  they  ought  to  be  largely  interested  in 


19 


the  property.  Such  a  plan  as  is  here  outlined 
would  place  the  management  of  the  Atchison  in 
the  hands  of  the  men  who  own  it.  That  is  where 
the  control  should  be  in  the  case  of  every  railroad 
in  the  country. 

The  time  is  coming  in  the  United  States,  not 
only  when  the  looting  of  insolvent  railways  in  fore¬ 
closure  will  be  at  an  end,  but  also  when  the  ex¬ 
clusive  control  of  elections  by  the  stockholding 
interest  will  give  place  to  a  control  by  the  owners 
of  the  property.  The  present  system  of  corporate 
control  has  in  it  the  seeds,  of  death.  Exclusive 
stock  voting  is  doomed.  With  every  decade  the 
relative  value  of  railroad  stock  to  railroad  bonds 
declines.  The  roads  are  owned  more  and  more  by 
the  bonds.  It  is,  therefore,  a  step  in  the  right 
direction  for  the  bondholding  interest  to  insist 
upon  a  voice  in  the  corporate  management,  and 
upon  such  a  renovation  of  the  worn-out  machinery 
now  in  vogue  in  corporate  elections  as  to  secure  it. 
When  the  present  method  of  conducting  corporate 
elections  was  adopted  there  were  no  railways,  and 
the  corporations  then  in  existence  were,  in  general, 
small  affairs,  under  the  personal  management  of 
^  the  owners  of  their  stock.  There  was  no  such 
thing  as  a  bonded  debt,  nor  any  such  a  thing 
known  as  liens  prior  to  the  stock.  We  have  in 
fifty  years  or  less  created  the  bonded  indebtedness 
of  a  thousand  railways,  and  no  inconsiderable 
portion  of  the  entire  investment  of  the  country  is 
in  railway  bonds.  But  we  still  go  on  with  our 
corporate  elections  just  as  our  fathers  did  a  gene- 


0112  062002214 


ration  and  a  half  ago,  and  boards  of  directors  of 
vast  systems  of  railways  are  elected  in  the  same 
primitive  way  in  which  our  grandfathers  created 
a  board  to  manage  a  cheese  factory  or  a  turnpike 
road  between  two  country  towns. 

Verily,  it  is  a  spectacle  for  gods  and  men,  when 
a  railway  worth  a  dozen  or  a  hundred  millions  of 
dollars  is  seized  at  a  corporate  election  by  a  board 
of  sharks  whose  aggregate  personal,  Iona  fide  hold¬ 
ing  of  its  securities  amounts  perhaps  to  seven  or 
eight  thousand  dollars,  and  “  run  ”  in  the  interest 
of  whom  it  may  concern,  until  it  is  bankrupt,  or 
until  some  more  fortunate  or  more  audacious 
crowd  of  financiers  ’’  get  it  in  hand.  The  stock¬ 
holder  is  essentially  an  irresponsible  creature. 
He  knows  no  duty  to  his  fellow-stockholders,  and 
none  to  his  corporation.  His  stock  is  an  invest¬ 
ment  or  a  “gamble.”  If  it  pays  he  may  keep  it. 

If  it  does  not  pay  he  is  sure  to  sell  it — if  he  can. 
His  proxy  is  delivered  by  his  broker,  for  a  com¬ 
mission,  to  the  highest  bidder,  and  his  vote  is  cast 
without  his  instruction,  or  knowledge,  or  slightest 
care.  It  is  not  strange  that  few  railway  stocks 
pay  dividends,  that  the  greater  proportion  of  these 
corporations  are  regularly  and  systematically  plun-  a 
dered  by  their  management,  that  shrewd  men  grow  , 
rich  in  Wall  street,  that  railway  manipulation  and 
manipulators  are  in  disgrace,  and  that  bondholders  J 
are  waking  up  to  the  propriety  of  taking  a  hand® 
in  the  game.  fl 

Charles  F.  Beach,  Jr.  I 


29  William  St.,  New  York. 


